Investor2,
1.) I was using the Midwest Exchange as a hypothetical example. You could've substituted any of the other regional exchanges or the third markets that are popping up. The .125 is not a service charge. The reason why a lot of trades are routed to the regionals instead of the NYSE is that the transaction costs for the brokerage are lower, and also, some of the smaller discounters are not NYSE member firms, and instead become member firms at a regional. Therefore, it is cheaper for them to rout the majority of their trades through the regional exchange, instead of paying an additional ticket charge to an NYSE member firm to execute the trade. Also, there are "third markets" that actually pay brokerages for order flow. The problem is, that the regionals and third markets are typically not as active as the NYSE. So lets say you wanted to buy 1000 shares of XYZ at 20. The stock is bid 20, offered 20 1/8. If your order was placed with the NYSE, you'd have a better shot at getting hit, because of the inherent greater activity there.
2.) I think its pretty safe to say that most of the time, an investor is better served by using a full-service guy, although this depends a lot on the investor's goals and needs. If you are an accomplished investor who fully understands the markets and how they work, and desire to put your money away in no-loads for the long haul, you probably don't need a fullservice guy. One of the problems is that there are a lot of fairly new investors out there who have never experienced a market meltdown, like in '87, or a prolonged bear market like in '73-74. An alarming trend that I am witnessing is that there are a lot of new investors who have become accustomed to annual 15-20% gains, who are now putting money that should be earmarked for their money market/CDs/bonds portion of their portfolio into stock funds, with the attitude of "what's the point in tying my money into something paying 4%, when I can put it ALL into something that has been delivering 15%--it's about as safe as a CD..." When and if the market crumbles, there are going to be some pretty shook-up investors out there who wondered what happened to that "15% S&P CD" they put their money into. These are people who need a little guidance from an honest broker.
I would say that most brokers have their clients' best interests in mind. Unfortunately, there are enough scheisters out there to make us all look bad. And this is, in part, due to the pressures put on brokers to meet production goals. I have seen otherwise honest brokers who are faced with a situation at the end of the month, where they need to do another $2000 in gross or get canned. In the interest of self-preservation, sometimes honest brokers get caught up into doing whatever it takes to keep their job. I had one broker who was in this situation tell me, "Look, its in my clients' best interest that I do these trades, because if I don't do them, I won't be around next month to service his account--and its in my clients' best interest that I have a job next month." Unfortunately, that's a function of how the brokerage business is set up. When a firm gives its brokers sales quotas in the same way a used car lot would give quotas to its salespeople, the brokers start to act like salesmen instead of fiduciary money managers for their clients. I've always thought it was silly that brokerages, the NASD and the SEC couldn't work out a compensation system that wouldn't create these inate conflicts of interest. Let a broker get compensated based on how well his clients' portfolios have performed, and investors would run back to the full-service firms. Unfortunately, the brokerages and the NASD are not interested in breaking up what is currently a great situation for themselves. Not surprisingly, a lot of the big producers are lousy brokers, but great salesmen. The firms wouldn't risk alienating some of their best producers by requiring them to produce for their clients as well. Being a broker, you are graded on all aspects and segments of production--they monitor how much proprietary stuff you push, how many of your clients have CMA accounts, etc. But I have NEVER seen a firm generate portfolio returns for each broker's clients and reward/discipline brokers for their work in that area. Maybe if the emphasis was placed back on the customer, the production would take care of itself.
With all of the pressure and inherent conflicts of interest, you'd be amazed at all of the brokers out there who maintain their integrity to their customers. There are a lot of us who take a lot of pride in how our customers make out based on our guidance. When a client makes a big score on a stock, I sometimes get more excited than the client. So I do get a little disgusted when someone uses a public forum to lump me in with all of the scheisters and say we're all sharks. |
